Sunday, October 31, 2010

Age of Empires (Part 2 of 2): Waning towards a fiscal straitjacket

The first part of this post centred on the notion of America as an empire, and how it differed from the prototypes of empires past. It concluded by mentioning briefly the role of financial statecraft -- the use of policies that influence financial flows to achieve both economic and traditional foreign policy goals. This should be expanded upon.

The United States has been home to the world's most influential and connected investment banks and financial institutions. To this day, these Wall St. firms are a magnet for talent and -- due to New York being the world's financial capital -- sources of access to capital, originators of financial engineering, and catalysts in the art of the deal; the moral hazard inherent in the US bail out of the financial system has done nothing to change this perception. However, these titans are not what they once were. The reality is that US banking will be burdened with toxic loans for years to come (despite the Fed's forthcoming QE2 measures where the central bank will presumably consume more of the wreckage of the sub prime mess) and a more stringent regulatory environment. Moreover, it is tarnished with the resentment from "Main St." as a bastion of fat cats bankers who undeservedly received bail out money in the aftermath of The Great Recession.

This belies the idea that a weakened American financial system is not only bad news for mainstream Americans, who will not have access to credit to spur economic growth via small businesses, but also for military power and the ability for America to exercise foreign policy. In realisttheory it is generally accepted that military power is the key requirement; this power is supplemented with wealth from industry and commerce which act as the key pipelines to acquiring the necessary military power. Logically, a weakened commercial sector, and by extension an anemic economic growth environment (which citizens in Western countries should be braced for in the coming decade due to debt ridden personal and government balance sheets), should entail a smaller flow of funds towards military expenditures. A fiscal crunch will come -- it is a matter of when not if and has been postponed thanks to the US dollar status as the reserve currency -- and this must mean eventual American disengagement (at least partially) in terms of its military reach. And this is despite the so-called "war on terror" that is believed to be just in the eyes of the neoconservative establishment, its loyal followers, and a percentage of the US population who live in perpetual fear of the "other".

Having said this, one must neither underestimate nor bet against the neoconservatives getting their way when it comes to America exercising muscular foreign policy; it may happen again after November 2 if the Republicans take control of the House (a probability) and the Senate (a possibility).

Taking the words (from Foreign Affairs, Jul. - Aug. 1996) of the Neocon movement's scion, William Kristol, publisher of The Weekly Standard and the best know of the conservativeelites, it is his contention that America's rightful international role is that of a "benevolent global hegemon":

"Having defeated the "evil empire," the United States enjoys strategic and ideological predominance. The first objective of U.S. foreign policy should be to preserve and enhance that predominance by strengthening America's security, supporting its friends, advancing its interests, and standing up for its principles around the world." [1]

He goes on to state that the question of a threat is misconceived:

In a world in which peace and American security depend on American power and the will to use it, the main threat the United States faces now and in the future is its own weakness. American hegemony is the only reliable defense against a breakdown of peace and international order. The appropriate goal of American foreign policy, therefore, is to preserve that hegemony as far into the future as possible. To achieve this goal, the United States needs a neo-Reaganite foreign policy of military supremacy and moral confidence. [2]

Mr. Kristol exercised his substantial powers of persuasion during the eight years of George W. Bush's administration where America exercised deficit spending in order to go on its military excursions into Iraq and Afghanistan and exacerbated the fiscal situation by implementing the panacea of tax cuts on a willing public that had been fed the supply-side pablum of the Laffer curve.

But where does that leave America's foreign policy ambitions in the slow growth world post Great Recession world where confidence is low, middle America resentful, and structural unemployment much higher than reported and job growth lower than expected? They must be curtailed.

No doubt, the United States will remain dominant but its power, due to the realities of fiscal austerity that is being undertaken globally -- in small steps by many nations, in a giant leap by a few -- will wane as all levels of government hurtle head long towards a fiscal strait jacket.

The level of political discourse during the current U.S. mid-term elections has ranged from vacuous to barbaric; the world's most powerful nation remains in denial of the tough decisions it faces from entitlements to taxation to defence spending to health care.

The populist infused, billionaire -- think of the Koch brothers -- funded rhetoric of the grass roots Tea Party movement has done nothing to frame the conversation on a rational plateau. Notwithstanding the Pollyanna notion of tax cuts helping to balance budgets, one must be recognize that military expenditures will be cut and America's military reach will be curtailed lest America become a totalitarian military dictatorship -- a highly unlikely scenario even amongst the greatest pessimists.

In the March/April 2008 issue of Foreign Policy, 3,400 active and retired officers at the highest levels of command were surveyed; when asked whether it was reasonable or unreasonable to expect the U.S. military to successfully wage another major war at this time, 80% of the officers said it was unreasonable.[3]

When asked about the U.S. military's preparation in terms of successfully fight a conflict in four hot spots (on a 1-10 scale with 1 being unprepared, 10 fully prepared), the results were: 4.9 for the Taiwan Strait; 4.7 for North Korea; 4.5 for Iran; and 5.1 for Syria. [4]

The Stockholm International Peace Research Institute (SIPRI), a global think tank, has done outstanding work on the military spending and armaments which has shown that America's expenditures in this regard have increased despite the economic downturn.[5]

Amid the deafening calls for fiscal austerity and the criticism of fiscal stimulus for an indebted nation, there must inevitably be a conversation about defence expenditure?

How long can this -- like America's addiction to foreign capital to fund its current accounts and budget deficits -- continue? Not indefinitely. While the sun did not set on the British Empire, Britain had to live within its means once its imperial ambitions outstripped its economic capacity.

It is vital to put a human cost to the neoconservative policies of benevolent hegemony. Consider the work of Linda J. Bilmes (who co-authored The Three Trillion Dollar War with Joseph Stiglitz) when she provided provided some preliminary figures in an essay that presaged her book:

Veterans who can no longer hold down a job, due to physical or mental injuries, are likely to qualify for Social Security disability compensation (adding another $22 billion to $38 billion to the bill). For others, the injuries they have suffered in Iraq and Afghanistan will eventually swell the rolls of Medicare, as the long-term effects of injuries and chronic illnesses appear.Staggering though they are, these costs only represent the impact of the war on the U.S. federal budget. The many social and economic costs that the government does not pay, such as the loss to the economy of so many young, productive Americans and the costs paid by the state and local governments, communities, and private medical providers, could add another $415 billion to the total cost to the economy. Americans have so far focused only on the ballooning short-term price of the wars in Iraq and Afghanistan. but we have not yet counted the cost of caring for veterans, replenishing military equipment, and restoring the armed forces to their pre-war strength. This was will prove one of the costliest in U.S. history -- one whose bill we pass to the generations that follow. [6]